Chapter 12: Project Procurement Management

1. Chapter 12:Project Procurement Management Information Technology Project Management, Seventh Edition Note: See the text itself for full citations.

2. Learning Objectives Understand the importance of project procurement management and the increasing use of outsourcing for information technology (IT) projects Describe the work involved in planning procurements for projects, including determining the proper type of contract to use and preparing a procurement management plan, statement of work, source selection criteria, and make-or-buy analysis Discuss how to conduct procurements and strategies for obtaining seller responses, selecting sellers, and awarding contracts Information Technology Project Management, Seventh Edition

3. Learning Objectives (cont’d) Understand the process of controlling procurements by managing procurement relationships and monitoring contract performance Describe the process of closing procurements Discuss types of software that are available to assist in project procurement management Information Technology Project Management, Seventh Edition

4. Importance of Project Procurement Management Procurement means acquiring goods and/or services from an outside source Other terms include purchasing and outsourcing Experts predict that global spending on computer software and services will continue to grow People continue to debate whether offshore outsourcing helps their own country or not Information Technology Project Management, Seventh Edition

5. IT Outsourcing Market Continues to Grow U.S. companies are transferring more work abroad, especially in the areas of IT infrastructure, application development and maintenance, and innovation processes India, China, and the Philippines are the preferred locations for outsourcing, and Latin America is growing in popularity A shortage of qualified personnel, not cost savings, is the top reason for global outsourcing of IT services Information Technology Project Management, Seventh Edition

6. Why Outsource? To access skills and technologies To reduce both fixed and recurrent costs To allow the client organization to focus on its core business To provide flexibility To increase accountability Information Technology Project Management, Seventh Edition

7. Contracts A contract isa mutually binding agreement that obligates the seller to provide the specified products or services and obligates the buyer to pay for them Contracts can clarify responsibilities and sharpen focus on key deliverables of a project Because contracts are legally binding, there is more accountability for delivering the work as stated in the contract A recent trend in outsourcing is the increasing size of contracts Information Technology Project Management, Seventh Edition

8. Project Procurement Management Processes Project procurement management: Acquiring goods and services for a project from outside the performing organization Processes include: • Planning procurement management: Determining what to procure and when and how to do it • Conducting procurements: Obtaining seller responses, selecting sellers, and awarding contracts • Controlling procurements:Managing relationships with sellers, monitoring contract performance, and making changes as needed • Closing procurements: Completing and settling each contract or agreement, including resolving of any open items Information Technology Project Management, Seventh Edition

9. Figure 12-1. Project Procurement Management Summary Information Technology Project Management, Seventh Edition

10. Planning Procurement Management Identifying which project needs can best be met by using products or services outside the organization If there is no need to buy any products or services from outside the organization, then there is no need to perform any of the other procurement management processes Information Technology Project Management, Seventh Edition

11. Types of Contracts Different types of contracts can be used in different situations: • Fixed price or lump sum contracts: Involve a fixed total price for a well-defined product or service • Cost reimbursable contracts: Involve payment to the seller for direct and indirect costs • Time and material contracts: Hybrid of both fixed price and cost reimbursable contracts, often used by consultants • Unit price contracts: Require the buyer to pay the seller a predetermined amount per unit of service A single contract can actually include all four of these categories, if it makes sense for that particular procurement Information Technology Project Management, Seventh Edition

12. Point of Total Assumption The Point of Total Assumption (PTA) is the cost at which the contractor assumes total responsibility for each additional dollar of contract cost Contractors do not want to reach the point of total assumption, because it hurts them financially, so they have an incentive to prevent cost overruns The PTA is calculated with the following formula: PTA = (ceiling price – target price)/government share + target cost Information Technology Project Management, Seventh Edition

13. Cost Reimbursable Contracts Cost plus incentive fee (CPIF): The buyer pays the supplier for allowable performance costs plus a predetermined fee and an incentive bonus Cost plus fixed fee (CPFF): The buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs Cost plus percentage of costs (CPPC): The buyer pays the supplier for allowable performance costs plus a predetermined percentage based on total costs Information Technology Project Management, Seventh Edition

14. Contract Types Versus Risk Information Technology Project Management, Seventh Edition

15. Contract Clauses Contracts should include specific clauses to take into account issues unique to the project Can require various educational or work experience for different pay rights A termination clause is a contract clause that allows the buyer or supplier to end the contract Information Technology Project Management, Seventh Edition

16. Tools and Techniques for Planning Purchases and Acquisitions Expert judgment Market research Make-or-buy analysis: General management technique used to determine whether an organization should make or perform a particular product or service inside the organization or buy from someone else Information Technology Project Management, Seventh Edition

17. Make-or-Buy Example Assume you can lease an item you need for a project for $800/day. To purchase the item, the cost is $12,000 plus a daily operational cost of $400/day How long will it take for the purchase cost to be the same as the lease cost? Information Technology Project Management, Seventh Edition

18. Make-or Buy Solution Set up an equation so both options, purchase and lease, are equal In this example, use the following equation. Let d be the number of days to use the item: $12,000 + $400d = $800d Subtracting $400d from both sides, you get: $12,000 = $400d Dividing both sides by $400, you get: d = 30 If you need the item for more than 30 days, it is more economical to purchase it Information Technology Project Management, Seventh Edition

19. Procurement Management Plan Output of Plan Procurement Process Describes how the procurement processes will be managed, from developing documentation for making outside purchases or acquisitions to contract closure Contents varies based on project needs Information Technology Project Management, Seventh Edition

20. Contract Statement of Work (SOW) A statement of work is a description of the work required for the procurement If a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a contract statement of work A SOW is a type of scope statement A good SOW gives bidders a better understanding of the buyer’s expectations Information Technology Project Management, Seventh Edition

21. Statement of Work (SOW) Template Information Technology Project Management, Seventh Edition

22. Procurement Documents Request for Proposals: Used to solicit proposals from prospective sellers • A proposal is a document prepared by a seller when there are different approaches for meeting buyer needs Requests for Quotes: Used to solicit quotes or bids from prospective suppliers • Abid, also called a tender or quote (short for quotation), is a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer Information Technology Project Management, Seventh Edition

23. Request for Proposal (RFP) Template Information Technology Project Management, Seventh Edition

24. Source Selection Criteria It’s important to prepare some form of evaluation criteria, preferably before issuing a formal RFP or RFQ Beware of proposals that look good on paper; be sure to evaluate factors, such as past performance and management approach Can require a technical presentation as part of a proposal Information Technology Project Management, Seventh Edition

25. Conducting Procurements Deciding whom to ask to do the work Sending appropriate documentation to potential Sellers Obtaining proposals or bids Selecting a seller Awarding a contract Information Technology Project Management, Seventh Edition

26. Approaches for Procurement Organizations can advertise to procure goods and services in several ways: • Approaching the preferred vendor • Approaching several potential vendors • Advertising to anyone interested A bidders’ conference can help clarify the buyer’s expectations Information Technology Project Management, Seventh Edition

27. Sample Proposal Evaluation Sheet Information Technology Project Management, Seventh Edition

28. Seller Selection Organizations often do an initial evaluation of all proposals and bids and then develop a short list of potential sellers for further evaluation Sellers on the short list often prepare a best and final offer (BAFO) Final output is a contract signed by the buyer and the selected seller Information Technology Project Management, Seventh Edition

29. Controlling Procurements Ensures that the seller’s performance meets contractual requirements Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts It is critical that project managers and team members watch for constructive change orders, which are oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order Information Technology Project Management, Seventh Edition

30. Suggestions for Change Control in Contracts Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls Information Technology Project Management, Seventh Edition

31. Suggestions for Change Control in Contracts (cont’d) Project managers and teams should stay closely involved to make sure the new system will meet business needs and work in an operational environment Have backup plans Use tools and techniques, such as a contract change control system, buyer-conducted performance reviews, inspections and audits, and so on Information Technology Project Management, Seventh Edition

32. Best Practice Accenture developed a list of best practices from experienced outsourcers throughout the world: • Build in Broad Business Outcomes Early and Often • Hire a Partner, Not Just a Provider • It’s More Than a Contract, It’s a Business Relationship • Leverage Gain-Sharing • Use Active Governance • Assign a Dedicated Executive • Focus Relentlessly on Primary Objectives Information Technology Project Management, Seventh Edition

33. Closing Procurements Involves completing and settling contracts and resolving any open items The project team should: • Determine if all work was completed correctly and satisfactorily • Update records to reflect final results • Archive information for future use The contract itself should include requirements for formal acceptance and closure Information Technology Project Management, Seventh Edition

34. Tools to Assist in Contract Closure Procurement audits identify lessons learned in the procurement process Negotiated settlements help close contracts more smoothly A records management system provides the ability to easily organize, find, and archive procurement-related documents Information Technology Project Management, Seventh Edition

35. Chapter Summary Project procurement management involves acquiring goods and services for a project from outside the performing organization Processes include: • Plan procurement management • Conduct procurements • Control procurements • Close procurements Information Technology Project Management, Seventh Edition